Coordination Among BRICS Central Banks for Monetary Policy- Why the Need But Why So Difficult? Jeevan Khundrakpam Meeting of BRICS Economics Research Group NIPFP, February 27, 2012
Why Coordination is Important? Economies are increasingly getting integrated through various channels (trade, finance, etc) Economic policies have spillover effects, positive as well as negative eg., QE2 in the US & large capital inflows to EMEs Negative (threat to price and financial stability, commodity price volatility) Positive (improvement in US economy and benefit to EMEs)
Do Spillovers Necessitate Coordination? Is an ongoing debate in theoretical analysis Pre-New Open Economy Macroeconomics (NOEM) significant gains from monetary coordination NOEM framework little gains from coordination (Obstfeld and Rogoff, 2002) Subsequent models with generalized specification significant gains from coordination However, monetary policy coordination in practice has not been always forthcoming
Economic Diversity can make Monetary Policy Coordination Difficult GDP PPP (Billion USD) Per capita GDP (USD) Key Macro-economic Indicators: 2011 Investmen ts (% GDP) Fiscal Balance (% GDP) Reserve s (billion USD) CAB Savings Unemploy (% GDP) (% GDP) ment rate Brazil 2,309 12,917-2.3 17.3 19.8-2.6 352 6.7 China 11,316 5,184 5.2 53.8 48.7-2.0 3181 4.0 India 4,470 1,527-2.2 35.4 37.6-8.5 297 NA Russia 2,376 13,236 5.5 28.2 22.7 0.5 499 7.3 South Africa 555 8,342-2.8 16.6 19.4-4.9 49 24.5 Different exchange rate regimes further complicates coordination
BRICS Monetary Policy Frameworks Diverge Country Monetary Policy Framework Key Monetary Policy Tools Objectives Brazil Inflation Targeting Interest rate (Selic rate): interest rate on overnight interbank loans collateralised on federal debt instruments. Inflation- Point target of 4.5 per cent with +/- 2 percentage points for headline CPI Russia No single target indicator - Inflation (CPI) target for 3-years period - Managed floating exchange rate regime Refinancing rate, Reserve requirements To ensure stability of national currency India Multiple Indicators Approach Repo rate, CRR and SLR Maintaining price stability, financial stability and ensuring appropriate flow of credit to productive sectors. China Multiple Indicators Approach Reserve requirement ratio, Central bank base interest rate, rediscounting, Central bank lending, Open market operation and other policy instruments specified by the State Council Maintain the stability of the value of the currency and thereby promote economic growth. South Africa Inflation Targeting Key policy rate repurchase rate Inflation target range for headline CPI of 3-6% combined with financial stability objective.
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Divergence in CPI Inflations 16 14 12 10 8 6 4 2 0-2 -4 Brazil Russia India China South Africa
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 per cent Incomplete Synchronization of Policy Rates 20 18 BRICS key policy rates 16 14 12 10 8 6 4 2 0 Brazil Russia India China South Africa
Economic Linkage is Increasing Increasing synchronization of business cycle among BRICS and between BRICS with AEs Increasing trade linkages among BRICS- advanced economies still major trading partners Financial Sector linkages (Portfolio, FDI) of BRICSmostly with advanced economies Thus, domestic monetary policy in BRICS has to take cognizance of the strong inter-connectedness with advanced economies
Common Monetary Policy Concerns Some common set of issues relevant to monetary policy have emerged such as, Managing large and volatile capital inflows Maintaining stable economic environment for high growth & economic development Addressing global commodity price volatility Concern on inadequate global safety measures in case of simultaneous crisis in BRICS Can these common concerns be better addressed through monetary coordination?
Monetary Coordination- What are the Challenges? Easier during crisis period national objectives converge Normal times coordination could be difficult Divergence in monetary policy objectives Potential conflict with national interest The exit from crisis as an example Effective coordination most likely in the context of broad comity among nations (Eichengreen, 2011)
Monetary Coordination- What are the Challenges? Linkages need to be understood properly through research Similarly, spillover needs to be assessed and quantified» A beginning by IMF, 2011 for 5-systemic economies» A similar and more needs to be done for BRICS Need to develop a framework for monetary coordination Addressing fiscal dominance in individual countries is fundamental May involve fiscal coordination, which is difficult Need to develop a code of discipline to safeguard the framework But imposing the code of discipline will be a challenge more so if diverse interests are involved
Thank You